After weeks of crisis government, the budget agreement that has
emerged will damage the American economy even more than would have
the agreement that was defeated three weeks ago. The new pact will
ffidrease taxes more than the original agreement.The new p act will
increase spending, despite rhetoric to the contrary; indeed, the
agreement allows spending to increase at -near record rates, again,
more than in the original agreement. The new pact dips deeply into
the pockets of working class Americans directl y by pushing up the
price of gasoline, beer, tobacco and even airline tickets. And the
greatest damage is yet to come - in the recession that will follow
the tax increase. Businesses will close and contract, jobs willbe
lost, and the resulting fall in reve n ue to the Tteasury will
drive the budget deficit even higher. The budget pact would undo
the progress made in the 1986 Tax ReformAct, which lowered tax
rates and created only two statutory rates: 15 percent and 28
percent. To increase progrdssivity, a "bu b ble" wag created, with
a 33 percent marginal tax rate for taxpayers with income in the
bubble but a 28 percent mar- ginal tax rate for incomes over the
bubble.There has been much talk about eliminating this bubble.
This*- made sense if the bubble would ha v e been burst by keeping
the top marginal tax rate at 28 percent. In- stead, the bubble is
being expanded by creating a single top rate of 31 percent.. Tax
Trap. What is worse, while politicians and the Bush Administration
compliment each other for get tin g rid of the current "bubble" by
raising taxes on all Americans, they have created two new bubbles.
Not' only will this damage the economy immediately, it sets a tax
increase trap for next year when the high-tax advocates in the
White House and on Capitol H ill will argue that they again have to
raise taxes to remove a bubble. The first new bubble in the
proposed tax bill is created when taxpayers with incomes- above a
cer- tain level lose part of the value for such itemized deductions
as home'mortgage inter e st, state and local in- dome and property
taxes, and charitable contributions. This raises the marginal tax
rate for taxpayers in the affected income class by about one
percentage point; this is a threepercent hike. Marginal tax rates
for wealthy taxpayer s , however, will drop to the 31 percent level
once the value of their deductions is . depleted, creating the
bubble that becomes the political issue that the "rich" are not
paying a "fair" share.! The second new bubble is created by the
children's surtax. U nder the agreement, the value of personal'-
exemptions, including those for children, will be phased out for
taxpayers earning a certain level of in-''' S; come. The mechanism
for this children's tax, a one-half percentage point increase'in
marginal tax r a te . will push many upper-middle class taxpayers
into a tax bubble that could reach 37 percent. Once the value of
the personal exemptions is depleted, the marginal tax rate will
return to the statutory level. Tax-hungry politicians then will
quickly seize on the issue, pointing out that the very wealthy pay
lower marginal tax rates on the last dollar of income earned than
do taxpayers in this new bubble.The tax bill being con-

sidered in Congress will not only wreak damage in the near term,
it also sets the stage for equally destruc- tive tax increases next
year. Harming the Poor. Tle new agreement raises gasoline taxes by
5 cents per gallon. T'his, harms the poor especially. In this
extremely mobile nation with its vast expanses, the poor can least
affo r d to pay higher transportation costs. Yet they have little
choice but to turn over more of their earning in higher gas taxes
to the federal government to keep their jobs. The new agreement
hikes taxes for alcohol, tobacco, and air- line tickets. Elitist W
a shington policy makers have singled out working men and
womenjelaxing after work with a beer, to pay more to make up for
the inability of Congress and the White House to cut waste- ful
spending. And like gasoline, the poor pay a higher proportion of
their income for alcohol and tobacco. Combined with the gasoline
tax, the higher tax on air travel is particularly disturbing.
Families are spread out across America. Goods are shipped great
distances to market. The budget agreement's attack on America's
mobili t y will mean, among other things, higher prices for good,
fewer visits by families to dis- tant friends bind relatives on
holidays. And again, poorer Americans will suffer most. Most
harmful to the poor and middle class will be the recession that
will be i g nited by the new agree- ment. With the economy barely
growing and unemployment inching up, taking more money out of the
hands of consumers and businesses will end eight years of economic
growth and push the economy over the brink into recession. The
White House and congressional leaders seem to assume that a budget
agree- ment is an end in itself. They act as if nothing they do
will have real economic consequences. Yet the reces- sion will be
very real and the poor, as usual, will suffer most. It is puzzli n
g how Congressman and Senators with working class voters in their
states and districts could support a tax package that would so harm
their constituents. As a result, next year the great public
discussion will be how policy makers have harmed all American s .
As the public eventually examines the budget pact, the failure to
cut spending and the new and wasteful outlays will become a focus
of outrage. The public, for example, will be entitled to ask: Is it
worth paying 5 cents more for a gallon of gasoline so that the
federal government can spend $220 million on higher con- gressional
salaries, $1 million to study bicycling and walking, $500,000 on a
monument to entertainer Lawrence Welk, $500,000 for a parachute
drying tower, $ 100,000 for soybean based ink r e search and $
100,000 to study sand on Waikiki Beach? Forgetting History. T'he
new budget pact forgets the lessons of the 1970s and 1980s. In the
1970s spen ing and taxes grew, inflation rose and the economy
stagnated. All Americans, rich and poor, were hu r t. Ronald Reagan
changed the nation's economic direction. Lower taxes provided
incentives for increased economic activity. Unemployment dropped
from 10.6 percent at the depths of the 1982 recession to 5.1
percent earlier this year. Inflation tumbled, as d i d interest
rates and gasoline prices. Approximately 20 mil- lion net new jobs
were created during that period. This historical lesson is being
ignored by George Bush and the handful of his top aides responsible
for his budget decisions and by Congress. Th e y are returning to
the tax-and-spend policies of the 1970s. As the economy declines,
the pressures for more spending in- crease. The 1970s cycle of
decline will start anew. America peers over the brink of economic
disaster. T'his, is not because the Ameri c an people are lazy or
unproductive. It is because the White House and Congress are more
concerned with feeding the bloated federal bureaucracy and funding
pork barrel projects. T'hey forget that all of these excesses are
paid for by the American taxpayer. The economy will not be held
back from the brink by this proposed budget deal. It may be
possible to save the economy, however, if the tax increase is
rejected and policy makers rely in- stead on the
Gramm-Rudman-Hollings law to reduce the deficit by maki ng
automatic cuts in spending. Edward L Hudgins, Ph.D. Daniel J.
Mitchell Deputy Director of Domestic Policy Studies John M. Olin
Fellow in Political Economy